JOHANNESBURG, Sept 10 (Reuters) – South Africa is unlikely
to suffer a credit downgrade to junk in the short term, but the
slow pace of reform illustrated by a logjam over ailing state
power firm Eskom poses a serious risk, ratings firm Moody’s said
on Tuesday.

Moody’s is the last of the top three ratings firms to still
rank Pretoria’s debt at investment grade – Baa3 with a stable
outlook – and has not made a widely expected downgrade.

Fitch and S&P Global Ratings already have the country’s
sovereign debt on junk status, and losing the last investment
grade rating could trigger a selloff of billions of rands of
bonds, pushing up already soaring government borrowing costs.

All three ratings agencies have cited Eskom as the most
significant threat to economic growth and the government’s
ability to check ballooning debt.

On Tuesday, Moody’s lead analyst for South Africa, Lucie
Villa, said lack of clarity and progress on reforming Eskom,
including splitting it into three entities, was concerning.

“At the moment the issue that most illustrates that (policy
uncertainty) is Eskom and what is the strategic plan to turn
around the company,” Villa told a press briefing in.

In February, President Cyril Ramaphosa announced plans to
split Eskom into three units – generation, transmission and
distribution – to increase efficiency and manage costs.

Since then progress has been slow, with the utility losing
its tenth chief executive in as many years and Ramaphosa’s plan
facing loud opposition from powerful trade union federation
Cosatu.

In August a strategy paper published by National Treasury
that raised the idea of selling Eskom’s coal-fired power plants
was also rejected by Cosatu and some factions inside the ruling
African National Congress.

The government said last month it would soon publish a paper
on plans for the separation and how to wean Eskom off bailouts
that threaten to push public debt beyond the 60% debt-to-gdp
ratio seen as a red line by credit agencies.

“For us the key is to understand what is the official plan
that all key stakeholders agree to. That everybody is on the
same page with. If that were the case we would have something
credible and visibility about the long term strategy.”

MOUNTING BAILOUT

The Treasury has already earmarked 26 billion rand ($1.7
billion) to Eskom in the financial year which ends in March 2020
as part of special legislation to inject 59 billion rand over
two years. That is on top of a 23 billion rand a year bailout
for the next three years.

Eskom has, however, warned the money may not be enough to
meet operating costs and climbing debt-servicing payments. The
firm also warned last week it could not rule out another round
of power outages.

Moody’s said while it had trimmed its economic growth
forecast for 2019 to 0.7% from 1%, its stable outlook on debt
meant that a downgrade to sub-investment was unlikely in the
near term.

“At the political level, as things stand in terms of policy
orientation, we still see a very reform-oriented executive which
is why we still believe there is still some prospects of a
pick-up in growth,” Villa said.

“From a credit perspective the main downside risks are
actually to the longer-term perspective, so more from about 2020
to 2021 and beyond. And here we maintain our expectation of
growth of 1.5%”.

Africaâ€™s most developed economy recorded better than
expected growth of 3.1% in the second quarter following a deep
first quarter contraction, but analysts fear maintaining growth
at that level is unlikely.

On Tuesday data from the national statistics agency showed
manufacturing output fell 1.1% year-on-year in July after a 3.6%
contraction in June, underlining the fragile state of the
economy.
(Additional reporting by Nqobile Dludla;
Editing by Catherine Evans and Andrew Cawthorne)

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